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Labour takes aim at ‘tax dodgers’

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Shadow Chancellor, Rachel Reeves, has pledged that, should Labour form the next government, it will ‘crack down on tax dodgers’ to reduce the tax gap and direct the resulting extra £5bn a year in public funds to the NHS and schools.

Labour’s Plan to Close the Tax Gap sets out the following actions the party intends to take:

  • set a target to raise ‘up to £5bn per year by the end of the next Parliament from action on tax compliance’;
  • invest an extra £555m per year into HMRC to achieve that additional revenue (based on a 9:1 return on investment), representing a 12% increase in HMRC’s budget; and
  • reverse the planned £300m cut in HMRC’s capital budget, making that amount available to HMRC each year ‘for an expected return of £3bn over the parliament’.

The extra funding would be deployed according to a plan to be agreed with the Treasury and HMRC, which is expected to include:

  • 5,000 extra staff to be recruited to work on compliance, with the potential to commission external expertise in the interim period while HMRC staff are trained up;
  • targeting additional resource on sectors with the most complex tax affairs and where the scope of error is higher with greater amounts of tax at stake;
  • assessing what capacity should be dedicated to offshore tax compliance; and
  • ring-fencing some of the extra funding for ‘strategically important criminal cases’ to ‘bring back a strong deterrent where it is needed’.

Commenting on the proposals, Waqar Shah, Partner and Head of the Tax Disputes practice at law firm Kingsley Napley, said: ‘The target Rachel Reeves plans to raise is necessarily ambitious in an election year. Without doubt some of the proposals she has outlined would bring more into the tax net, however the question remains what funding HMRC needs to enforce this and how they can speed up investigations to improve efficiency... Ms Reeves will understandably want to create the impression more taxpayers will be in HMRC's cross-hairs in future and to that extent her proposals are a step towards achieving this.’

The party also intends to invest further in digitisation (although it is unclear how this would differ greatly from existing plans around online offerings for taxpayers and agents, and the move towards online support – which has been so widely criticised in recent months). The plan says: ‘Labour will work with businesses, the tax profession and digital service providers to bring a new focus to HMRC’s modernisation, including greater use of AI – learning from industry and best practice overseas to make sure its scope is ambitious, whilst having new, achievable timescales for delivery.’

Particularly significant are the outline proposals for legislative and regulatory changes, including taking forward the outcome of the consultation on proposals to regulate the tax advice market, although no direction of travel has been suggested so far.

The plans also suggest expanding the scope of DOTAS, including considering ‘whether to require all tax schemes to be disclosed’, strengthening oversight of HMRC’s investigations, and looking at potentially applying ‘Deferred Prosecution Agreements’ in individual tax evasion cases (to allow individuals to avoid a criminal conviction if they remedy any failures).

Whether the plans will achieve their objective will be open to question in the run-up to the general election and beyond, as Nimesh Shah, CEO of Blick Rothenberg, notes: ‘Labour’s claims of a ten-fold return on investment in additional tax revenue seem incredibly ambitious at a time when HMRC are struggling to answer the phones.

‘The Labour Party have said that they will bolster HMRC compliance officers by 5,000, invest in digitisation and work with businesses and the tax profession to modernise HMRC, including greater use of AI. This all sounds very sensible, but HMRC's customer service and standards are at an all-time low, with regular stories of shutting down phone lines and taxpayers not being able to access the right information. There is significant work to do for HMRC before we can start thinking about raising £5 billion additional tax revenue.’

The key issue here, says Shah, is ‘the complexity of the UK’s tax system – the longest tax code in the world. And I am sympathetic towards HMRC in the fact that it simply cannot keep up with the swathes of new legislation.’

Reeves’ plan does acknowledge the challenge here: ‘While resourcing is not a silver bullet and far from the only issue affecting HMRC’s performance, it is concerning that even as the numbers of taxpayers grow due to fiscal drag and population growth, HMRC’s resources are being taken away.’

The Financial Times reports that Reeves also has the UK government’s non-dom tax reforms in her sights, proposing to scrap the transitional protection which would bring only 50% of an individual’s foreign income into charge for 2025/26. The Labour Party would also bring offshore trusts into scope of UK inheritance tax, rather than excluding those assets in trusts set up before the new rules are expected to apply from April 2025. 

These latest soundings represent something of a recovery plan for Labour, with the Chancellor having ‘borrowed’ the party’s flagship policy to reform and restrict access to the remittance basis and extended the energy profits levy windfall tax on oil and gas producers – both of which Labour had been relying on to fund its NHS and schools plans. 

The BBC quotes Treasury Minister Laura Trott responding to Labour’s latest policy proposals: ‘After a month of searching for a plan to pay for Labour’s unfunded spending, the shadow chancellor still cannot say how she will fill the enormous black hole in their promises. And that means one thing – more taxes.’

James Quarmby, Partner and Head of Private Wealth at Stephenson Harwood, described Labour’s non-dom plans as ‘brutal’, noting that, with no transition period, non-doms would ‘go straight into worldwide tax from April 2025 if they have been in the UK for four years’. 

On the proposal to remove IHT excluded property trust status, Quarmby said: ‘This will be a deal breaker for many non-doms and will undoubtedly lead to many more departures, almost certainly past the point at which this turns revenue negative for the Treasury. This will mean less, not more, money for the NHS and other front line services – something I hope Labour will reflect upon before turning this into law.’

Separately, The Guardian reports that Labour has appointed an expert panel to advise on how to modernise HMRC and tackle tax avoidance. James Murray, Shadow Financial Secretary to the Treasury has suggested the party will look to give HMRC extra powers, in a ‘draconian crackdown on tax avoidance’, according to the paper, although will consult the expert panel ‘before putting forward detailed proposals’.

The panel is expected to bring together Sir Edward Troup, Bill Dodwell, Dame Margaret Hodge MP and Mike Bracken (former director of the UK Government Digital Service).

Issue: 1658
Categories: News